Much attention has been given to the competition between India and China for far-flung African resources. But perhaps the most tempting energy sources for each lie closer to home, in the Caspian region and Russia. It is here that much of the recent rivalry has been staged. Several recent Indian failures, in which firms from the subcontinent lost out to Chinese companies in deals in Russia and Central Asia, underline the extent of the mismatch between them.
In recent years Chinese national oil and gas firms have made deep inroads in Russia and the Caspian, signing long-term oil and gas supply agreements. Exports via the Kazakhstan-China oil pipeline are rising (they were up by 14% in 2013); the Chinese spur of the East Siberia-Pacific Ocean (ESPO) pipeline makes China a 1m-barrel market for Russian crude oil; and China has overtaken Russia as the main customer for Turkmenistan’s natural gas. China’s success in locking in access to these resources owes to geopolitics coupled with simple accidents of geography, its infrastructure advantages, as well as superior financial clout and the large and growing scope of its energy needs.
Shared borders with Russia and Central Asia, and stable relationships with these states, underpin China’s lead over India (although India also enjoys strong ties with Russia). This is embodied in the Shanghai Co-operation Organisation, a Beijing-headquartered, security-focused group bringing together Central Asian countries, Russia and China in a single forum, at which India is a mere observer (like Pakistan, it wants to become a full member). Compare this with the situation facing India as it seeks access to Russian and Caspian oil and gas.
Blocking the path of potential pipelines reaching India from Central Asia or Russia is Pakistan and, beyond that, Afghanistan. Thus, India’s rivalry with Pakistan, and instability in Afghanistan, erect high barriers to a Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, the long-discussed route designed to bring Caspian hydrocarbons to India. But foreign oil majors are unlikely to invest in the project given the current political and security climate across the region; Turkmenistan’s unwillingness to allow overseas companies to book onshore reserves further deters them. For the same reasons, a recent proposal to lay an oil pipeline from Russia to India running parallel to the TAPI pipeline is equally likely to founder.
In explaining why China holds the upper hand in its energy rivalry with India, superior Chinese commercial firepower is at least as important as politics. With weightier coffers than their Indian counterparts, and benefitting from better co-ordinated government support, Chinese oil companies can offer bigger and better terms. These include extra inducements, such as loans and access to the Chinese market.
China National Petroleum Corporation (CNPC) and Turkmenistan’s national oil company, Turkmengas, aim to boost Chinese imports of Turkmenistan’s natural gas to 65m cu metres/year by 2020. This target was tied to financing for the development of gas resources in Turkmenistan, and followed at least US$8bn in Chinese loans linked to long-term gas supplies in recent years. Similar agreements with Russia have featured “pre-payment” clauses and other financial boons. For example, in March 2013 the China Development Bank (CDB), a giant state policy bank, agreed to lend US$2bn to Rosneft, Russia’s state oil firm.
China has brought its financial armoury to bear twice in the past year to trump India in bids for two mega-projects. In September CNPC saw off Indian competition to buy an 8% stake, worth US$5bn, in Kazakhstan’s massive but troubled Kashagan oilfield. (A few months earlier, India’s flagship national oil company, Oil and Natural Gas Corporation, or ONGC, had tried to buy the share directly from ConocoPhillips of the US; instead, Kazakhstan’s Ministry of Oil and Gas intervened to acquire the interest itself, before selling it to CNPC.) The existence of the Kazakhstan-China oil pipeline, facilitating exports, partly explains why Turkmenistan chose CNPC over ONGC. But the decisive factor was surely CNPC’s ability to secure the Chinese government’s financial backing, to the tune of US$3bn, for the project’s second-phase development.
A similar rout occurred in June when CNPC trumped ONGC’s bid for a 20% stake in the US$20bn Yamal liquefied natural gas (LNG) project in the Arctic, where it will partner with Russia’s Novatek and Total of France. Novatek later signed a 15-year LNG supply agreement with CNPC for at least 3m tonnes/year after Yamal comes online in 2017. Once again, Chinese capital, rather than geopolitical muscle or technical expertise, appears to have made the difference: choosing CNPC opens the way to soliciting credit from CDB and several Chinese commercial lenders.
The Indian state, on the other hand, has been unable or unwilling to offer such preferential terms. In fact, its oil and gas corporations, including ONGC, struggle to raise capital themselves. During the past five years they have reportedly spent just US$13.6bn on buying up overseas assets, compared with Chinese outlays of US$107bn, according to data published in October 2013 by Bloomberg.
Finally, foreign suppliers’ decision to sell to China and not India amounts to a bet on the outlook for Chinese energy demand. The Economist Intelligence Unit estimates that China consumed more than two-and-a-half times as much oil and gas in 2013 as India did. Unsurprisingly, Chinese hydrocarbon imports are far greater than India’s.
Moreover, China’s oil and gas market is set to become even more alluring compared with that of India. Our industry forecasts suggest that Chinese consumption of oil and gas will expand by nearly 90% in 2011-20, whereas India’s will rise by a little less than 50%. This is yet another reason why energy companies and officials in Russia and the Caspian will continue to view China as a more favourable customer than India.
If Indian oil companies have any call for optimism, it stems from CNPC’s recent political difficulties. A corruption scandal has hit the upper echelons of the company, which has also been criticised for paying too much for overseas assets that bring little direct benefit to China. (Much of the output from foreign properties owned by Chinese national oil companies is sold into the global market, rather than being shipped back to China, and makes up a relatively minor proportion of the country’s total imports.)
The Chinese government will continue to underwrite overseas asset purchases in the name of shoring up China’s energy security. But state support for loans-for-oil packages seems likely to falter somewhat, giving other oil majors the chance to pick up more international assets. If Indian firms reap the rewards, it will not be because of advances in their own competitiveness, but rather thanks to a partial Chinese retreat.
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